Swiss real estate – Interest rates still driving the market

Conditions are still favorable for the Swiss real estate market. However, the climate is starting to get harsher. UBS CIO Wealth Management Research expects regulatory intervention, a steep increase in supply and pockets of overvalued real estate to throw more and more grit in the works of the real estate boom in 2013.

Zurich/Basel, 23 January 2013 – Housing prices have risen relentlessly and reached new highs every single year for the last 15 years. These high prices are starting to affect the real estate market significantly. Single-family homes and multi-family dwellings are increasingly due for a correction in the country’s fast-growing business centers. However, prices seem unlikely to fall any time soon, given today’s persistently low interest rates. For that reason, UBS CIO Wealth Management Research expects average prices in Switzerland to rise again in 2013: 3.0 percent for condominiums and 2.5 percent for single-family homes.

Efforts to slow down real estate boomThe property boom has raised pressure on lawmakers and supervisory authorities to regulate the market more strictly. In 2012, for example, new guidelines were passed on minimum requirements for mortgage financing. Also, the construction boom in high-tourism regions has unsettled the wider population, culminating in the adoption of the second-home initiative. The initiative’s implementation will be a challenge for courts and government agencies and a source of uncertainty for property owners for years to come. In addition, campaigns have already been launched to promote or oppose the referendum to amend the Spatial Planning Act (to be held in March 2013). Encroachments on property rights are always highly controversial, but UBS CIO Wealth Management Research believes the new law will have very little impact on land and property prices.

Unabated growth in business spaceAttractive financing terms have affected the business property market by continuously driving up prices. The high capital gains seen in recent years are probably a thing of the past, though. An office space glut will shape the course of 2013. Project promoters will have to adjust to a more difficult marketing environment in Zurich, Bern and especially Basel.

Shopping centers will face a similar fate if all the projects in the pipeline are actually completed. In 2012, competition with neighboring countries drove down prices; retail sales plummeted more than at any other time in the last 20 years. However, retail sales should stop their descent this year, buoyed by factors including immigration-driven increases in overall demand.

Fireworks are over for real estate funds and equitiesListed real estate should see a relatively humdrum 2013. Interest rates are near rock-bottom, which significantly curtails opportunities for capital gains. Instead, the focus will lie on increasing rental revenue. As such, real estate equities should hardly outperform the overall stock market. Real estate funds also have to contend with historically high valuations. Profit-taking seems reasonable in this context despite robust dividend yields.